Sport Caps Co. manufactures and sells caps for different sporting events. The fixed costs of operating the company are $150,000 per month, and variable costs are $5 per cap. The caps are sold for $8 per unit. The production capacity is 100,000 caps per month. Required 1. Use the formulas in the chapter to compute the following: a. Contribution margin per cap. b. Break-even point in terms of the number of caps produced and sold. c. Amount of income at 30,000 caps sold per month (ignore taxes). d. Amount of income at 85,000 caps sold per month (ignore taxes). e. Number of caps to be produced and sold to provide $60,000 of income (pretax). 2. Draw a CVP chart for the company, showing cap output on the horizontal axis. Identify (a) the breakeven point and (b) the amount of pretax income when the level of cap production is 70,000. 3. Use the formulas in the chapter to compute the a. Contribution margin ratio. b. Break-even point in terms of sales dollars. c. Amount of income at $250,000 of sales per month (ignore taxes). d. Amount of income at $600,000 of sales per month (ignore taxes). e. Dollars of sales needed to provide $60,000 of pretax income.
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
Sport Caps Co. manufactures and sells caps for different sporting events. The fixed costs of operating the
company are $150,000 per month, and variable costs are $5 per cap. The caps are sold for $8 per unit. The
production capacity is 100,000 caps per month.
Required
1. Use the formulas in the chapter to compute the following:
a. Contribution margin per cap.
b. Break-even point in terms of the number of caps produced and sold.
c. Amount of income at 30,000 caps sold per month (ignore taxes).
d. Amount of income at 85,000 caps sold per month (ignore taxes).
e. Number of caps to be produced and sold to provide $60,000 of income (pretax).
2. Draw a CVP chart for the company, showing cap output on the horizontal axis. Identify (a) the breakeven
point and (b) the amount of pretax income when the level of cap production is 70,000.
3. Use the formulas in the chapter to compute the
a. Contribution margin ratio.
b. Break-even point in terms of sales dollars.
c. Amount of income at $250,000 of sales per month (ignore taxes).
d. Amount of income at $600,000 of sales per month (ignore taxes).
e. Dollars of sales needed to provide $60,000 of pretax income.
Trending now
This is a popular solution!
Step by step
Solved in 2 steps with 2 images
